Company profits -- and their shares -- have been sideswiped by tumbling energy prices, a strengthening dollar and rising labor costs. Those same forces are lifting consumers’ spirits as they pay less for gasoline at the pump and for imported suits at the mall while reaping the benefits of a tighter jobs market.
“There are strong cross-currents in the economy” as households prosper and businesses suffer, said David Hensley, director of global economics for JPMorgan Chase & Co. in New York. “The balance, though, is positive for growth.”
While consumer spending fell in December by the most in five years, households were taking a breather after a surge in buying during the previous two months. For the fourth quarter as a whole, household expenditures rose at the fastest clip in almost nine years, according to data from the Commerce Department in Washington.
Typically, a shift in income away from companies to workers marks the beginning of the end of an expansion: Stronger salaries lead to faster inflation, prompting the Federal Reserve to boost interest rates. But with wage gains muted and inflation below the central bank’s 2 percent target, Fed policy makers have signaled they’re in no rush to announce their first rate increase since 2006 and will be restrained in tightening credit once they do.
“The expansion is still middle-aged,” Hensley said.
Best Performance
Gross domestic product will advance 3.2 percent in 2015, its best performance since 2005, according to the median forecast of 81 economists, surveyed by Bloomberg News from Jan. 9 to Jan. 14. It climbed 2.4 percent last year.
Consumers, whose spending accounts for close to 70 percent of GDP, are leading the way. Their confidence jumped to an 11- year high in the latest monthly survey by the University of Michigan as steady job gains and plunging gas prices boosted sentiment.
Businesses are more reserved. Factory activity expanded in January at the slowest pace in a year as orders cooled, a sign that weakness in overseas markets is restraining U.S. manufacturing. The Institute for Supply Management’s index dropped to 53.5 from 55.1 in December, a report from the Tempe, Arizona-based group showed on Feb. 2. That’s still above the 50 mark that signals growth.
Strong-Dollar Hit
A variety of companies -- from consumer-goods corporation Procter & Gamble Co. to pharmaceutical maker Pfizer Inc. -- complained last week that the stronger dollar will cut into their profits by reducing the value of foreign sales. The Bloomberg Dollar Spot Index, which tracks its performance against a basket of 10 leading currencies, has risen about 9 percent since Sept. 30, 2014.
Investors are taking note. The Standard & Poor’s 500 Index has fallen some 3.3 percent since hitting an all-time high of 2,090.57 on Dec. 29. It was 2,020.85 at 4 p.m. in New York on Feb. 2.
Yardeni Research Inc. last week cut its forecast for earnings of S&P 500 companies this year by $5 per share, to $120, partly in reaction to the rising dollar, president and founder Edward Yardeni wrote in a Jan. 28 note to clients. He also lowered the New York-based company’s end-of-year target for the stock gauge to 2,150 from 2,300.
“We have a problem with earnings,” he wrote.
Less Exposed
The economy, though, is less exposed to the drawbacks of a stronger currency and weaker global growth, according to Jan Hatzius, chief economist at Goldman Sachs Group Inc. in New York. He sees GDP rising 3.3 percent in 2015.
Foreign sales accounted for 46.3 percent of revenue for the S&P index companies in 2013, based on compilations by S&P Dow Jones Indices in New York. By contrast, U.S. exports comprised just 13.5 percent of GDP that year.
Consumers, meanwhile, benefit as the robust dollar reduces price for imports, including oil. Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, reckons that each 1 cent per gallon drop in gasoline prices boosts U.S. household purchasing power by about $1 billion. The price for a gallon of regular gas has fallen 44 percent from late June, based on data from motoring group AAA.
With transportation accounting for about 70 percent of U.S. petroleum consumption, households probably will be bigger beneficiaries from the oil-price decline than businesses, said Jonathan Cogan, spokesman for the U.S. Energy Information Administration in Washington.
Quarterly Loss
Oil companies, of course, are suffering. ConocoPhillips, the third-largest U.S. energy producer, reported its first quarterly loss since 2008 on Jan. 29 as new output failed to make up for the worst oil-price crash in five years.
Workers are starting to enjoy the benefits of a shift in the balance of power in the job market. At 5.6 percent in December, the jobless rate is close to the 5.2 percent to 5.5 percent range most Fed policy makers reckon is equivalent to full employment. In addition, almost half of U.S. states raised mandated minimum wages for workers on Jan. 1.
Alicia Courtney, 28, sees the improvement firsthand. Feeling “kind of stuck” in her old job, she said she began looking for a new one in August. Search service FlexJobs helped her land a position in mid-November as an account manager at EmoryDay LLC, a digital marketing company.
“There are certainly more jobs available out there,” said Courtney, who is earning about 20 percent more now and works from home in Lawrenceburg, Indiana. “This is exactly what I wanted. I was pretty confident I’d find a new job, and it wasn’t too difficult.”
Earning Squeeze
The shift is problematic for corporate earnings, unless bosses get more production out of their employees. Peter Bensen, chief financial officer at McDonald’s Corp., said rising labor costs are squeezing earnings at the world’s biggest restaurant chain.
The profit “margin in the U.S. will continue to be a little bit pressured,” he told analysts on a Jan. 23 conference call.
Even with the squeeze, the economy still is set for growth this year of about 3 percent, according to former Fed vice chairman Alan Blinder.
“It looks like things are falling into place and clicking” for the U.S., said Blinder, now a professor at Princeton University in New Jersey.
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